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Estimating large-scale factor models for economic activity in Germany : do they outperform simpler models?

  • Dreger, Christian
  • Schumacher, Christian

This paper discusses a large-scale factor model for the German economy. Following the recent literature, a data set of 121 time series is used via principal component analysis to determine the factors, which enter a dynamic model for German GDP. The model is compared with alternative univariate and multivariate models. These models are based on regression techniques and considerably smaller data sets. Out-of-sample forecasts show that the prediction errors of the factor model are smaller than the errors of the rival models. However, these advantages are not statistically significant, as a test for equal forecast accuracy shows. Therefore, the effciency gains of using a large data set with this kind of factor models seem to be limited.

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Paper provided by Hamburg Institute of International Economics (HWWA) in its series HWWA Discussion Papers with number 199.

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Date of creation: 2002
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Handle: RePEc:zbw:hwwadp:26321
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Web page: http://www.econstor.eu/handle/10419/20
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